Ron Wortel: High Gold Prices Raise Old Mines

Source: Zig Lambo and JT Long of The Gold Report (4/25/11)

Dramatic rises in metals prices over the past 2 years could bring 10 or more past-producing mining camps back to life. In this Gold Report exclusive, MineralFields Group's Engineer and Investment Analyst Ron Wortel shares how he finds promising gold juniors working these mines and structures tax-advantaged, flow-through investments to finance Canadian resource development.

The Gold Report: Ron, can you give us a little background on your company, MineralFields Group, and what it'll be looking at in the future?

Ron Wortel: MineralFields was founded 10 years ago and just recently surpassed the $1-billion mark raised from our Canadian investors looking for substantial income tax breaks, along with the ability to enjoy absolute returns on the flow-through investments we offer them. MineralFields is the most consistent, top-performing fund among the flow-through limited partnerships. We have a unique, multilayered due diligence team that includes two senior mining analysts, of which I'm one, a senior technical analyst, two great portfolio managers, an in-house legal team and an association with the geological consulting firm of Watts, Griffis & McOuat Ltd.

TGR: How did your company get into this area of flow throughs?

RW: Our principals were looking at ways to reduce taxes for their accounting clients, and one of the best ways to do that in Canada is by using these flow-through deductions and tax credits to offset income. They present the opportunity to invest in somewhat early stage exploration companies while reducing income taxes. It has just grown from there.

TGR: Can you explain how flow-through financings work and what the advantages would be for the companies receiving the financings and for the investors?

RW: This is strictly related to Canadian investors who invest in Canadian properties and pass on Canadian tax credits. For decades, the Canadian government has allowed junior miners, which need to spend lots of money on exploration before they achieve success, the ability to pass their exploration-expense tax credits through to the investors who then purchase flow-through shares from the miners.

These investors can use the flow-through tax credits against their income, thereby lowering their taxes. Flow-through financings are unique to Canada and have allowed it to become the world's largest mining nation. We Canadians spend more on mining exploration than any other country. Without the government's support for junior miners through this tax system there would be a lot less mining exploration taking place in Canada. Because junior mining stocks are more risky, fewer mining investors would be buying them without the incentive of these flow-through tax breaks. The result is more access to capital for junior exploration companies.

TGR: I understand there is some controversy about continuing the flow-through exploration tax credit. What changes are being considered?

RW: Every year there is a federal budget wherein an extra federal 15% tax credit for exploration companies is included. These are called the "super flow-through credits." They also were included in the past budget, which was put forward in March, but the government was defeated on this budget vote. We are in the middle of an election campaign now, so it's in limbo pending who comes back into power and decides if this extra 15% will be renewed. But the standard 100% deduction is still in place.

The budget also called for the elimination of the charitable donation of flow-through shares. In this case, investors would purchase flow-through shares for their tax credits, and then immediately donate them to a registered charity for additional tax reductions. This change is also now in limbo with the defeat of the budget. We are in favor of this change, as we felt it distorted the market for flow-through shares with significant premiums paid by investors who were using this tax reduction opportunity.

TGR: Are the projects concentrated more in certain provinces?

RW: No, we invest throughout the country. We look at each company and project individually to see if it merits an investment.

TGR: What does MineralFields look for when it's deciding whether to sponsor a particular company?

RW: We have a full team of due diligence people looking at each company and project before we do any investing. Basically, we're looking for a credible management team with a successful track record and a good project. We also look for diversification across commodities and locations. As for the company itself, we have to see a good share structure and the company's ability to get its message out to the market so we can see some share appreciation when it does get results.

TGR: In the past, it seems that most resource stocks tended to float up with a rising market. Now we have record gold and metals prices and things seem a little different in that a lot of the smaller companies don't seem to be participating. Would you agree with that?

RW: I generally do because the Canadian junior resource sector is still a small part of the overall investment market. There's significant competition for these scarce dollars by the more than 1,000 junior companies. With strong commodity prices, there is increased interest in this market sector. But the reasons for the high gold price, such as overall market insecurity and an increase in perceived investment risk, run counter to investing in junior explorers that are more risky. The stocks that are developing significant resource assets and making big discoveries are rewarded with price appreciation and good liquidity.

Sometimes commodity prices lead stock prices, and other times the mining stocks appreciate faster than the underlying commodities. With gold rising quite significantly in a relatively short time, some senior gold equities have seen a lot of gains and might be a little overbought. The juniors may still be lagging, and there's still an opportunity there for investors.

TGR: Many of the movers with the best price appreciation are companies with good stories. What are some of the best stories you're seeing these days?

TGR: Can you give us a little background information on these companies?

RW: Let's start with Trueclaim Exploration, which is a company I've been working with closely since our first investment in it several years ago. The company has a team with a strong mining and development background that can put a mine into production and has done it many times in the past. This experience is bringing in new projects wherein the vendors also want to work with a group that will do what they say and get it done. We expect continued good results from Trueclaim's key Canadian gold project, the Scadding Gold Mine, just outside of Sudbury, which was a small past producer where it is drilling and expanding the historic resource. Trueclaim also is working on a silver exploration project just outside of Globe, Arizona, which is a known large copper-producing region. We expect to see continued drilling results and expansion of these assets.

TGR: When do you expect to see production or major milestones in its exploration work?

RW: In 2011, Trueclaim is focusing on the Scadding Gold Mine to define a resource of several hundred thousand ounces; so, I think that's one of the milestones. In Arizona, it is a very historic silver camp that probably hasn't been worked for over a century. So, we're going to see some drilling, and then confirmation that there's mineralization in the ground, which could be quite interesting in this super-high silver price market right now. The company is also on the lookout for an asset it can take into production even faster; so, you might see some action in the way of a corporate transaction.

TGR: You also mentioned Trade Winds Ventures?

RW: Yes. I recently published a research report on Trade Winds Ventures that can be found on First Canadian's website. I am recommending the stock with a speculative buy rating and a $1.50 target price. The company holds a 50% interest in a +5-million-ounce (Moz.) gold deposit in the Detour Lake area of Northeastern Ontario. Its neighbor and partner is Detour Gold Corp. (TSX:DGC), a multibillion-dollar-market-cap company, which is developing a new mine. There was a mine in the past at this project, and it was closed in the 1990s.

This belt holds more than 30 million ounces of defined resources, and Trade Winds is the junior with the potential to add to this resource. The company continues to drill the belt and add ounces at low cost, and there's a real opportunity for it to develop its own mine with this growing resource base. But the stock continues to trade at a significant discount, in terms of enterprise value per resource ounce, when compared to its peers. We're trying to get the story out so the market understands this high-quality asset and results in some price appreciation.

TGR: What else do you like?

RW: Visible Gold Mines is a well-financed junior with a planned 40,000m drill program for 2011 on four projects that's on the lookout for additional gold targets. The company's projects are located in Quebec with the core of the landholding on the outskirts of the mining center of Rouyn-Noranda. This location makes the work easier and cheaper, and it makes future development more likely. Visible's projects hold the past-producing Silidor Gold Mine and a resource associated with the extension of the former Stadacona Mine. Current drilling at Silidor is making discoveries of new gold-bearing veins adjacent to the old mine that were never worked.

With this large drilling program in 2011 we can expect Visible Gold to keep generating results for the market. A new compliant resource for the Stadacona East project was just released and showed an increase of more than 60% from the previous estimates. This company continues to show success from its exploration programs.

TGR: You mentioned two or three other companies. Can you give us more details on those?

RW: Carlisle Goldfields is operating in the Lynn Lake mining camp in northern Manitoba. Its main asset is the MacLellan Mine, another small-scale, past producer. The company was revitalized with new management and a focus on new resources and consolidating the known gold resources in the camp. It continues to be successful and is currently well financed to advance its plan.

Total resources at the MacLellan Mine are now over 1.2 Moz. gold equivalent (Au Eq.). When we first invested in Carlisle, it had about 400,000 ounces (Koz.). Also, there's significant silver in this deposit with a silver:gold ratio of 3:1. With improving silver prices, we should see an increase in this resource's value. The company's latest acquisition has a historic resource of more than 270 Koz. grading 9.4 grams per ton (g/t)—that's a pretty good grade in this market. This project will see the drill in 2011 and we expect to see another leap in Carlisle's compliant resources in 2011, given its current cash balance and plans to put two to four drills on the project.

TGR: Another one you mentioned was Clifton Star.

RW: MineralFields, essentially, discovered this story. We provided the funding for the rest of the market and industry to then discover. Clifton Star's major project is a gold resource development project located in Duparquet, Quebec, just 40 kilometers (km.) north of the major mining center of Rouyn-Noranda. The Duparquet Project also was a past producer, but it was bigger. Mining companies pulled more than 1.2 Moz. from three deposits before the 1950s, and the land had been dormant in private hands since then. The property covers over 6.5 km. of strike length along the well-known mineralized structure that also hosts the Timmins Gold Camp, where more than 70 Moz. has been mined thus far.

Clifton Star project hosts a resource of more than 2.5 Moz. now. The potential to increase this attracted a significant partner—Osisko Mining Corp. (TSX:OSK), which optioned 50% of this project to commitments of over CAD$100M in exploration and funding. This exceeded Clifton Star's market cap by a significant margin at the time of the option agreement. Osisko was looking for its next development project, and this project held all indications that it could re-grow its resource base and meet this need.

The project, one of the larger programs out there, saw over 120,000 meters of drilling in 2010; a new expanded resource estimate is expected at any time. We published a report on Clifton Star a couple of years ago when it held 100% of the project. At that time, our price target was $5.35 a share. This report can be found on the First Canadian Securities website. Gold prices are up over $500/oz. since the report was first published. With all this drilling on an expanded target, we expect to see at least a doubling of the resource value—and that's making our report's target in line for the company's 50% stake, should Osisko complete its investment and work commitments. Osisko must spend all of its $70M in exploration expenditures to gain its 50% stake; otherwise, the full project returns to Clifton Star.

Golden Hope Mines is working in the Beauce, Quebec. Its properties are located along the Bellchasse gold belt—historically, the location of Canada's first placer gold rush. So, it's not working an old mining property but rather making a new discovery. Perhaps, the source rocks for this gold were never found until now. The company's land package encompasses over 20 km. of strike along this mineralized trend. Golden Hope's focus is on outlining a near-surface bulk-tonnage resource at the Bellchasse-Timmins gold deposit. This target is known to extend 850m on strike, 650m wide and to a depth of 650m—it's a big block of gold-bearing rock. Average grades range from 2–3 g/t from drilling and bulk sampling, and these values indicate the potential for a multimillion-ounce deposit at this project. We hope to see the first resource estimate on it in 2011.

The company is working several other targets in the immediate area that also show gold-bearing characteristics similar to the Bellchasse-Timmins deposits. Results from the winter drilling program are forthcoming. Farther afield, along the belt, the company is also working on prospects for additional drilling in 2011 with hopes for discovery of the next deposit.

TGR: With all of these former mines that are being reopened, is this kind of another Golden Age for gold due to price or technology? What macrotrend are you seeing that makes these projects viable again?

RW: Yes, it is a macrotrend. The cliché is: "The best place to find a new mine is in the shadow of the head frame of an old mine." So, the price appreciation is the ticket here. A lot of these old mines were being mined on the narrow vein, high-grade concept in the 1920s and 1930s when gold was $20/oz., and then moved up to $35/oz. So, at the time, it could go for narrow-vein, high-grade material only. Now, gold is at $1,500/oz.—that's a quantum leap in price, and you might also consider it a quantum leap in costs. Costs have increased significantly but not so much that it's stopped the company from looking at this new bulk-tonnage model. New technology, in the sense of bigger trucks and machines to get more tonnage, gets the costs down. And better recovery processes can handle lower grades; so, it's a blend of price appreciation and technology.

TGR: Over the next three to five years, how many of these smaller, high-grade underground mines do you think might be operating in Quebec, Ontario and Eastern Canada?

RW: It's hard to say. I guess there's one success, as far as new bulk-tonnage projects and that's one of the companies we talked about—Clifton Star's partner, Osisko. It took the Canadian Malartic Mine (a former underground, high-grade operation), which is now an open-pit mine where Osisko had its first gold pour on April 13, 2011. One of the next projects that could come onstream in 2013 is Detour Gold's Detour Lake Gold Project.

As far as other projects, it remains to be seen; there are several of them. There could be 10, maybe a few more. It is capital intensive and you have to get through the regulatory regime to get these things back into production. It's still risky capital even in a high-price market but there certainly is a prize because there is good money to be made. That's something we hope the general market will understand—that there are significant cash flows associated with these mining companies.

TGR: Why are many investors still reluctant to enter this sector, considering some of the phenomenal price increases?

RW: Well, not everything is going up. We think it's a healthy sign for the junior market that the mining stocks are not in a bubble because most investors probably have just a tiny percentage of their portfolio in them; so, it's a matter of educating people in the opportunities available in these stocks.

TGR: Just to clarify, you're saying that, because all of these juniors haven't appreciated, it means we're not in a bubble and that it's a good sign?

RW: That's correct. Last fall, there was a bit of a run where more of the stories were gaining momentum. Right now, some market and world events have created more risk. So, we're back to more of a story-specific than a general uptrend for everybody while still in a high-price environment.

TGR: Do you believe small investors aren't in this market to the extent they were in past market cycles?

RW: Yes. Many of these small investors got hurt in the 2008–2009 meltdown; so, they're arriving late to this next party. But the 'smart money' like John Paulson, George Soros and MineralFields saw 2008 and 2009 as a great opportunity to get in again. Soon small investors will realize that we're only in the early to mid part of this historic commodities supercycle and we should still see significant appreciation for these juniors and near-term producers.

TGR: So, hopefully, we're still far from the peak of the market as far as you can see?

RW: Yes, I do believe so. All of the people on the other side of the world, who want to live something close to the life we live in North America, are creating demand for commodities, which should translate into price appreciation for the companies looking for them.

TGR: Thank you for taking the time to share your insights with us today, Ron.

RW: Thank you.

Ronald J. Wortel joined MineralFields' associated financial intermediary in the Toronto office as the executive vice president of mining investments in June 2006. He joined MineralFields after two-and-a-half years with Northern Securities as its senior mining and metals analyst, where he provided equity research on 22 junior and intermediate TSX-listed mining companies. Ron was one of the first mining analysts to focus exclusively on the large and underserviced Canadian junior mining market. His coverage of this sector includes more than 60 names in the past 10 years. Prior to entering the financial services sector, he worked in the consulting-engineering sector with Golder Associates for seven years. Ron is a professional engineer with a geological engineering degree from the University of Waterloo and an MBA from the Ivey School of Business and the Rotterdam School of Management.

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DISCLOSURE:1) Zig Lambo and JT Long of The Gold Report conducted this interview. They personally and/or their families own shares of the following companies mentioned in this interview: None.2) The following companies mentioned in the interview are sponsors of The Gold Report: Trueclaim Exploration and Detour Gold.3) Ron Wortel: I personally own shares of the following companies mentioned in this interview: Clifton Star, Trueclaim, Trade Wind Ventures and Carlisle Goldfields. I personally am paid by the following companies mentioned in this interview: MineralFields and its associated companies, whose revenues in part include fees associated with financings and report preparation for the companies discussed in this interview.